Changes in the regulatory landscape have given great prominence to the reasonableness of compensation. Reasonable compensation is a requirement of virtually every aspect of financial services, and the attention is likely to increase with every new regulation. Compensation has also been the prime target for recent litigation.
After years of certifying the reasonableness of compensation, Dalbar found little difficulty with investment and insurance products or services such as record keeping, administration or custody. The products and services have a well-defined role, and while there have been excesses, these excesses are easily identified and corrected.
Advisor compensation, however, has been a challenge. While the amount of compensation is easily determined, the role and services provided are often poorly defined. These inadequate explanations, both verbal and written, create the illusion of excess. For the most part, it is the advisors themselves that make their compensation appear excessive. Advisors who articulate a well-defined and valuable role and can explain the services they provide to the average consumer generally have no trouble proving that their compensation is reasonable.
There are several ways that advisors devalue their role so that compensation appears to be excessive. The two most common ways that advisors undervalue their role are in the definition of that role and describing the associated services. Amazingly, these failures can be corrected at virtually no cost, but will require a change in thinking and in language.
Defining the Role
Unlike any other professional, advisors often think of their role as selling products and services. Imagine doctors thinking of themselves as salesmen of hospital stays and operations. Or attorneys as lawsuit salesmen. Or auto mechanics as salesmen of car parts. Or athletes as salesmen of admission tickets to games! Such roles would not come close to explaining their compensation, even though those roles give rise to their compensation.
Like the doctor, attorney, mechanic and athlete, the advisor has a greater mission that should define his or her role. Among the best that we have seen has been “…to develop recommendations and monitor progress to a personal goal.” This is a role that has an enormous value to clients.